Hedge funds redeemed USD5.0 billion in September, the second outflow in three months, according to BarclayHedge and TrimTabs Investment Research. Industry assets decreased to USD1.72 trillion, the lowest level in 12 months.

“Hedge fund investors have grown much more cautious,” says Sol Waksman (pictured), founder and President of BarclayHedge. “They pumped USD58.5 billion into hedge funds between January and June, the heaviest first-half inflow since 2007. But then they withdrew money in two of three months for the first time since 2009.”

Hedge fund investors have been dumping emerging markets equities. Emerging markets hedge funds redeemed USD3.7 billion in September, the third straight outflow as well as the heaviest since April 2009. Returns were ugly. The Barclay Emerging Markets Index plunged 7.7% in September, the worst return since October 2008.

“While hedge fund investors are extremely bearish on emerging markets equities, ETF investors are wildly bullish,” notes Leon Mirochnik, Research Analyst at TrimTabs. “The flow data we track daily shows that emerging markets ETFs raked in USD5.1 billion in the past four weeks. Performance has proven impressive. Some emerging markets ETFs returned as much as 19% in less than a month.”

The latest TrimTabs/BarclayHedge Survey of Hedge Fund Managers reveals that managers remain bearish on domestic equities, although they are less downbeat than four weeks ago. Bearish sentiment on the S&P 500 decreased to 41% in October from 57% in September, while bullish sentiment increased to 35% from 16%. The survey also reveals that hedge fund managers are most upbeat on the Russell 2000 Value Index and the Russell Global Large Cap Index, while they are least upbeat on the Russell 2000 Growth Index.

“This result does not surprise us,” notes Mirochnik. “The Fed is in the process of buying USD400 billion in long-dated Treasuries and selling an equal sum in the short end, while markets are especially volatile and uncertain as the debt crisis in Europe rages.  In an environment like this, it makes sense to us that hedge funds managers are much more interested in large caps and dividend yield than growth.”